In February 2020, the Milan Court of Appeals came to a different conclusion by ascertaining that, under specific factual and contractual circumstances, a put option agreement between shareholders should be qualified as a patto leonino and, therefore, was null and void.
In this article we analyze the reasons behind the ruling of the Milan Court of Appeals and the differences with respect to the precedent cases ruled upon by the Supreme Court to offer some tips on how to draft a valid put option while taking into account Italian law principles.
In the case at hand, the shareholders’ agreement entered into by the two shareholders (hereinafter “Alpha” and “Beta”) of an Italian limited liability company sets forth a put option clause in favor of Alpha, whereby Alpha is entitled to sell its entire stake in the company to Beta, and Beta is obligated to purchase such stake at the higher of two predetermined prices: either EUR325,000 or an amount calculated based on the combined EBITDA and net financial positions of the company and its subsidiaries. The put option is enforceable for a limited period of time.
During the agreed time period, Alpha exercised the put option by inviting Beta to enter into a sale and purchase agreement of Alpha’s stake for a consideration of EUR325,000. However, Beta refused Alpha’s invitation and formally objected to the legality of Alpha’s put option.
Then, Alpha summoned Beta before the Court of Milan to get a ruling to force the sale of its stake to Beta: the Court upheld Alpha’s arguments and declared the put option fully valid and enforceable. Thereafter, Beta appealed the ruling of the court before the Court of Appeals, which instead confirmed Beta’s complaints and declared Alpha’s put option null and void according to Italian corporate law principles.
Before moving to the analysis of the ruling of the Court of Appeals, a couple of additional pieces of factual information may be relevant:
The two main arguments used by Beta are:
The court agreed with Beta’s arguments by focusing on the contents of the shareholders’ agreement and the factual circumstances under which the put option was exercised.
Indeed, the court stated that the shareholders’ agreement as a whole set forth several mechanisms aimed at (i) increasing Alpha’s stake in the company by acquiring Beta’s quotas at a nominal value, if the business was successful, while also (ii) protecting Alpha from the losses of the company by ensuring the recovery of the overall amount invested in the company plus a capital gain, if the business was unsuccessful.
According to the court, although the put option at hand was enforceable within a limited time, the enforceability of the option even in case of zeroed equity, liquidation, or bankruptcy of the company, in conjunction with Alpha’s overall protective mechanisms as set forth in the shareholders’ agreement, actually shielded Alpha completely from suffering liability due to company losses. Therefore, the put option was a patto leonino and, as such, was null and void.
In its ruling, the Milan Court of Appeals formally referred to the principle set forth by the Italian Supreme Court in July 2018, according to which the validity of put options shall be assessed taking into account the specific purpose pursued by the shareholders. However, based on this principle, in 2018 the Supreme Court declared that put option clauses aimed at financing a company’s business (like the one at hand) represent an alternative instrument for corporate financing and, as such, shall be considered fully valid and enforceable.
Of course, it bears noting that the factual circumstances of the cases are not the same. However, it is also evident that there remain uncertainties for legal practitioners drafting put option clauses, and a new ruling from the Supreme Court would be of the utmost importance in terms of restoring confidence in the use of put option clauses as a financial instrument.
Meanwhile, the ruling of the Milan Court of Appeals gives us some other tips on how to draft a valid and enforceable put option clause under Italian law principles:
The ruling of the Milan Court of Appeals is available at the following link: http://mobile.ilcaso.it/sentenze/civile/23732#gsc.tab=0.
 Italian Supreme Court, rulings of July 4, 2018, Nos. 17498 and 17500.
 Whereby the financing shareholder has the right to sell to the other shareholder, who is obligated to purchase, its equity shares in the company at a predetermined price.
 Section 2265 of the Italian Civil Code.
 Milan Court of Appeals, ruling of February 13, 2020.
 Court of Milan, ruling No. 10426/2017.
 It should be noted that, following the ruling at hand, the Court of Milan took different positions in other rulings, e.g., in ruling No. 2213/2020, the Court of Milan declared a put option with a predetermined price fully valid and enforceable; in ruling No. 4628/2020, though, the Court of Milan declared a put option null and void because it constituted a patto leonino.